Minnesota Supreme Court’s Abolishment of Century-Old Common-Law Prohibition Against Champerty Paves Way for Third-Party Litigation Financing
In a unanimous decision, the Minnesota Supreme Court abolished Minnesota’s common-law prohibition against champerty and maintenance, opening Minnesota to third-party litigation financing. Maslowski v. Prospect Funding Partners LLC, et al., A18-1906, 2020 WL 2893376 (Minn. June 3, 2020).
For the less practiced in Middle English, champerty is “an agreement to divide litigation proceeds between the owner of the litigated claim and a party unrelated to the lawsuit who supports or helps enforce the claim” and maintenance is “improper assistance in prosecuting or defending a lawsuit given to a litigant by someone who has no bona fide interest in the case, meddling in someone else’s litigation.” Black’s Law Dictionary (11th ed. 2019). Today, champerty and maintenance are often associated with third-party litigation financing.
The prohibition against champerty and maintenance, rooted in ancient Greece and Rome and medieval England’s common law, was adopted in Minnesota in 1897. See Huber v. Johnson, 70 N.W. 806 (Minn. 1987). The purpose was “to prevent officious intermeddlers from stirring up strife and contention by vexatious or speculative litigation which would disturb the peace of society, lead to corrupt practices, and pervert the remedial process of the law.” Under the prohibition, contracts between attorneys and laypersons to “hunt up” claims to litigate for profit were voided. Gammons v. Johnson, 78 N.W. 1035, 1037 (Minn. 1899); see Hackett v. Hammel, 241 N.W. 68 (Minn. 1932); Holland v. Sheehan, 122 N.W. 1, 2-3 (Minn. 1909).
Maslowski involved a plaintiff who was injured in a car accident. While her claim was pending, the plaintiff and a third-party litigation financing service entered into an agreement through which the plaintiff received a cash advance on her prospective settlement. In exchange, the plaintiff agreed to repay the advance when the case settled, plus 30 percent every six months until settlement, with a cap. When she failed to make the payment after settlement, the dispute arose.
The contract unquestionably violated Minnesota’s existing prohibition against champerty. Maslowski, 2020 WL 2893376, at 7. Nevertheless, the Minnesota Supreme Court concluded that changes in the legal profession and society made the prohibition against champerty no longer necessary for several reasons:
First, the rules of professional responsibility and civil procedure address the abuses of the legal process that necessitated the common-law prohibition. There are strict limits on solicitation, Minn. R. Prof. Conduct 7.2 & 7.3, and attorneys who file frivolous claims or use the legal system for harassment are subject to discipline and sanctions. Minn. R. Prof. Conduct 3.1, 11.02, & 11.03.
Second, as the law has developed and regulation has increased, courts have narrowed or abolished other prohibitions based on concerns of champerty and maintenance, including the relaxation of rules prohibiting contingency fees and assignment of choses in action — Middle English for the right to sue.
Third, societal attitudes toward litigation have shifted. Many now see a claim as a potentially valuable asset, rather than an evil to avoided. Businesses often seek financing to mitigate the risks associated with litigation and maintain cash flow for their operations. Moreover, litigation financing, like the contingency fee, may increase access to justice for both individuals and organizations.
Fourth, third-party litigation financers will not likely fund frivolous litigation claims because they only profit from their investment if a plaintiff receives a settlement that exceeds the amount of the advance — an unlikely result in a meritless suit.
Fifth, tort victims’ right to receive compensation for their injuries does not override their freedom to contract, and those seeking commercial litigation financing understand the risks involved in such agreements.
Notwithstanding its abolition of the general bar on champerty, the Court stated that courts “may still scrutinize litigation financing agreements to determine whether equity allows their enforcement.”
The court warned against:
Uncounseled agreements between parties of unequal bargaining power or agreements involving an unsophisticated party
Agreements that allow litigation financiers to control the course of the underlying litigation, specifically as to settlement decisions.
Although the Court’s reasoning fits the circumstances of the individual plaintiff in the Maslowski case, the analysis does not fully account for the role and influence of litigation financing in larger litigation, particularly in mass torts involving multidistrict litigation proceedings (MDLs). As courts have observed, the MDL process already creates incentives for attorneys to file cases that otherwise would not be filed based on their own merit, based on the assumption that these cases will be swept into an MDL where a global settlement will be reached and the merits of the case will never be scrutinized. See, e.g., In re Mentor Corp. Obtape Transobturator Sling Prods. Liab. Litig., 4:08–MD–2004 (CDL), 2016 WL 4705827, (M.D. Ga. Sept. 7, 2016).
The introduction of litigation financers can only aggravate this problem by providing a ready source of funding that can generate thousands of additional claims, a few with real value but the vast majority lacking any merit whatever. This is not a theoretical problem; we see it over and over in MDL proceedings around the country. Defendants can only wait and see whether the Maslowski decision will generate or aggravate such problems in Minnesota.
One certain consequence of the Maslowski decision will be a marked increase in disputes over whether and to what extent a party may conduct discovery into an opposing party’s litigation financing arrangement. The Maslowski court makes clear that litigation financing agreements, although now permitted, are not automatically reasonable or enforceable, and expressly directs courts to watch out for agreements that are unconscionable, coerced, or unfair, or that may impede a party’s ability to settle a case. To raise or argue any of these possible objections, however, a party will need information about the existence and terms of an opponent’s litigation financing, and the opponent will doubtless object to discovery into such matters.
Courts that have addressed disputes over discovery of litigation financing agreements have reached mixed results. See, e.g., In re Valsartan N-Nitrosodimethylamine (NDMA) Contamination Prod. Liab. Litig., 405 F. Supp. 3d 612, 614 (D.N.J. 2019) (“[C]ourts are split on the issue and plaintiffs and defendants can each cite to cases supporting their positions”).
A number of courts have permitted full or limited discovery of such financing information. See, e.g., In re: Am. Med. Sys., Inc., MDL No. 2325, 2016 WL 3077904 (S.D. W.Va. May 31, 2016); Gbarabe v. Chevron Corp., 14-CV-00173-SI, 2016 WL 4154849 (N.D. Cal. August 5, 2016). Now that champerty is legal in Minnesota, tort defendants will need information concerning litigation financing agreements, particularly with respect to any limitations on settlement, and will doubtless press courts for the discovery of such information. We can expect Minnesota’s trial and appellate courts to devote substantial energy over the next few years in defining what is and is not permissible discovery on this issue.